Monday, May 23, 2011

Beating a Dead QE2

I thought I had suffered through enough of these types of stories over the past six months to last me a lifetime, but apparently not. Hasn't this innocent, blameless, and very dead horse been beaten sufficiently by now? And yet... some masochistic streak in me forces me to read it:

BOSTON (MarketWatch) — It‘s cost $600 billion of your money. And it was supposed to rescue the economy. But has Ben Bernanke’s huge financial stimulus package, known as “Quantitative Easing 2,” actually worked as planned?

QE2 is being wound down in the next few weeks. Fed Chairman Ben Bernanke has said it has left the economy “moving in the right direction.” But an analysis of the real numbers tells a very different story.

I've only snipped the first two paragraphs from this story, but that much is enough to contain two fundamental and oft-repeated errors which I've resisted commenting about in the past, but can resist no longer.

Correction #1.You can't tell if QE2 worked by simply looking at actual economic data. Why? Because you need to compare it to something. So in order to tell the effects of any particular policy you have to compare actual economic data with what would have happened in the absence of the policy. I have yet to see a critic of QE2 attempt to make the correct comparison.

Correction #2. QE2 didn't cost anything. Nothing. Nada. All that happened was that the Fed bought a bunch of long-term assets. The money didn't disappear. The Fed still has that $600 billion; it's just in the form of long-term bonds now.

Oh, and then of course this column makes the other common mistakes about the Fed's purchases of long-term assets, implying that QE2 is the same as money creation (which it isn't), and that it has caused inflation (which it hasn't). Okay, time to stop reading.

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The Street Light is written by economist Kash Mansori, who works as an economic consultant (though views expressed here are entirely his own), writes whenever he can in his spare time, and teaches a bit here and there. You can contact him by writing to the gmail account streetlightblog. (More about Kash.)